MidCap Financial Investment Corporation (MFIC) Q3 2021 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Apollo Investment Corporation’s Earnings Conference Call for the period ended December 31, 2020. At this time all participants have been placed in a listen-only mode. The call will be opened for question-and-answer session following the speakers’ prepared remarks. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation.

Thank you, operator, and thank you, everyone, for joining us today. Speaking on today’s call are Howard Widra, Chief Executive Officer; Tanner Powell, President and Chief Investment Officer; and Greg Hunt, Chief Financial Officer. I’d like to advise everyone that today’s call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available on our earnings press release. I’d also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today’s conference call and webcast may include forward-looking statements. Forward-looking statements involve risks and uncertainties, including, but not limited to, statements as to our future results, our business prospects and the prospects of our portfolio companies. You should refer to our most filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.apolloic.com. I’d also like to remind everyone that we posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company’s financial performance. At this time, I’d like to turn the call over to Chief Executive Officer, Howard Widra.

Thanks Elizabeth. Good afternoon and thank everyone for joining us today. I’ll begin today’s call with a review of the progress we’ve made repositioning our portfolio over the past year, followed by an overview of the December quarter, including a review of our financial results. Following my remarks, Tanner will review our investment activity for the quarter and provide an update on credit quality. Greg will then review our financial results in greater detail and provide an update on our liquidity position. We will then open up the call to questions. During today’s call, we will be referring to some of the slides in our investor presentation, which is posted on our risk on our website. As we said previously, we have been very focused on improving the quality of our investment portfolio. And despite the challenging environment, we continue to make significant progress towards this objective in calendar year 2020. We continue to reduce our exposure to non-core and legacy assets, which are higher on the risk spectrum. Non-core and legacy assets declined from 12% of the portfolio year ago to 8% at the end of December on a fair value basis. We continue to improve the quality of our core corporate lending portfolio as evidenced by a higher exposure to first lien loans and improving credit metrics. First lien loans increased from 82% of the corporate lending portfolio a year ago to 86% at the end of December, second lien loans decreased from 17% of the corporate lending portfolio to 13% over the same period. The weighted average net leverage of our corporate lending portfolio was 5.31 times at the end of December, relatively unchanged year-over-year, despite the more challenging environment. And the weighted average attachment point declined from 0.9 times a year ago to 0.6 times at the end of December. As we look ahead to calendar year 2021, we believe our corporate lending portfolio will continue to perform well given these credit quality metrics. We will continue to focus on monetizing our remaining non-core assets. Regarding Merx Aviation, our aircraft leasing portfolio company, we believe our aviation team has the experience to skillfully navigate the unprecedented challenges in the industry due to the coronavirus pandemic. Moving to the quarter specifically, as mentioned on our last call, we entered the quarter with visibility into a meaningful amount of repayments. As expected, net leverage declined significantly from 1.56 times at the end of September to 1.43 times at the end of December, driven by a strong net repayments as well as a slight increase in stockholders’ equity. Importantly repayments during the quarter included investments that we’ve been seeking to exit including non-core assets and second lien investments. Given the reduction in AINV’s net leverage, we have begun to shift our focus to new investment activity as we continue to manage our existing portfolio. As a reminder, AINV operates as part of Apollo’s broader direct origination business, which has over $30 billion of commitments under management. So although AINV has been focused on reducing leverage for the past few quarters, the broader platform has remained active, the direct origination platform closed more transactions in the month of December than at any month in its history. Shifting to the portfolio, our corporate lending portfolio was consists primarily of first lien floating rate loans to companies and less cyclical businesses continues to hold up relatively well as we continue to recoup some of the losses recorded during the March quarter. Over the past three quarters, our first lien corporate lending portfolio has recovered approximately $32.6 million, or $0.49 representing 62% of losses recorded in the March quarter. We believe the performance of our corporate lending portfolio during this challenging period demonstrates its resiliency and quality. The corporate lending portfolio which represents 79% of the total investment portfolio is 86% first lien, 100% floating rate and 88% sponsor backed. We also believe that we are seeing some stabilization in our investment in Merx, our aircraft leasing portfolio company, which recorded a slight net gain during the period. Tanner will discuss Merx in greater detail later during the call. The repayment of one of our renewable investments also resulted in a net gain during the period. Our oil and gas investments had a net loss during the period, in aggregate there was a $4.9 million net gain on the total portfolio during the quarter. Slide 16 in our investor presentation shows the gain/loss by strategy over the last four quarters. Moving to our financial results, net investment income for the quarter was $0.43 per share, reflecting a smaller portfolio given our net sales and repayments partially offset by an increase in fee income compared to the prior quarter. In addition, given the total return feature in our incentive fee, no incentive fees were accrued during the quarter. Net asset value per share at the end of December was $15.59, a $0.15 or 1% increase. $0.08 of the increase was attributable to net gain on the portfolio and $0.07 was attributable to retained earnings. Excluding the $0.05 supplemental distribution recorded during the quarter, NAV per share would have increased 1.3% during the quarter. Turning to our distribution, as discussed on our last few call calls in addition to a quarterly based distribution, the company’s board expects to declare supplemental distribution in an amount to be determined each quarter. For this quarter, the board has declared a base distribution of $0.31 per share, and a supplemental distribution of $0.05 per share payable on April 5, 2021 to shareholders of record as of March 19, 2021. With that, I’ll turn the call over to Tanner to discuss our investment activity and our portfolio.

Thanks, Howard. Beginning with the market environment activity picked up during the quarter due to pent-up demand as companies rushed to close deals before year end. Despite the increase in activity, the environment remains competitive. Credit documents, structures and pricing are close to if not at pre-COVID levels. That said private credit continues to be a solution of choice for many borrowers. Moving to AI in these activities, we were selective investors during the period given our focus on reducing our leverage. New corporate lending commitments for the quarter were $108 million across 13 companies for average new commitment of $8.3 million. 100% of these new commitments were first lien floating rate loans, 92% were made pursuant to our co-investment order. The weighted average spread on these new commitments was 598 basis points. The weighted average net leverage on new commitments was 4.4 times. Total sales and repayments were relatively strong during the quarter. Sales were $18 million, repayments were $185 million and gross revolver paydowns were $85 million for total exits of $287 million. Net repayments for the quarter were $130 million including $33 million of net revolver paydowns. Notable repayments during the quarter included our $39 million first lien position in Wright Medical, our $31 million second lien investment in CT technologies and $14 million paydown from AMP Solar Group, a non-core renewable energy investment, which resulted in a net gain of approximately $5.6 million during the quarter. As Howard mentioned, given our current leverage, we have begun to shift our focus to new commitments just as we are seeing a pickup in overall market activity. Looking forward, we will continue to focus on reducing our exposure to non-core and secondly investments. Turning to the portfolio composition, our investment portfolio had a fair value of $2.48 billion at the end of December, across 143 companies in 27 industries. We ended the quarter with core assets representing 92% of the portfolio in non-core assets representing 8%. First lien assets represented 86% of the corporate lending portfolio. Weighted average spread on the corporate lending portfolio was 633 basis points. The weighted average attachment point was 0.6 times. And investments made pursuant to our co-investment order were 80% of the corporate lending portfolio at the end of the quarter. Moving to credit quality, while we continue to see some need for covenant relief within our portfolio, we did see a decline in the number of amendments during the quarter. We placed one new investment on non-accrual status during the quarter. Our second lien investment in Ambrosia Buyer or Trimark was placed on non-accrual status. The company is a distributor of food service equipment and supplies in North America and has been struggling during the pandemic as its restaurants, customers were forced to close. We continue to receive scheduled cash interest payments from the company, but we’ll be applying those proceeds to the amortized cost of our position. At the end of December, investments on non-accrual status represented $155 million or 5.6% of the portfolio cost; and $28 million or 1.1% at fair value. In addition, we wrote off several investments that had been on non-accrual status and which had a total cost of $7.9 million and zero fair value. Moving to Merx, during the December quarter, the fair value of AI in these investment in Merx increased $1.1 million or 0.3%. The slight increase quarter-over-quarter reflects the lease extension and refinancing of Merx’s freighter on attractive terms, reflecting the current strong demand for cargo aircraft in the post-COVID market, particularly offset – partially offset by a decrease in the fair value of certain of Merx’s passenger aircraft reflective of the ongoing impact that the pandemic is having on passenger air travel. Similar to other industry participants, many of Merx’s lessees were requested rent deferrals and/or rent reductions during the pandemic in the first part of the calendar year. Most of Merx’s lessees have exited their deferral periods and have begun to repay prior rents in line with the amended lease terms. We believe Merx’s portfolio compares favorably with other major lessors in terms of asset geography, age, maturity and lessee diversification. Merx’s portfolio is skewed towards the most widely used types of aircraft, which means demand for Merx’s fleet is anticipated to be resilient. Merx’s fleet consists primarily of narrow body aircraft serving both U.S. and foreign markets. At the end of December, Merx’s his own portfolio consisted of 81 aircraft, 10 aircraft types, 40 lessees in 26 countries with an average age of 10.5 years. Merx’s fleet includes 78 narrow body aircraft, two wide body aircraft in one freighter. Merx is focused on remarketing aircraft that are due to come off lease in 2021, either via extensions with existing lessees or releasing to other airlines on long-term leases. At the end of December eight aircraft were scheduled to come off lease in 2021. Extensions for two of the eight aircraft have already been executed. Four aircraft are currently under negotiation or for extension or sale. Merx is actively remarketing the remaining two aircraft. As Howard mentioned, our aviation team has the experience to skillfully navigate this period of market stress and the requisite capabilities to mitigate potential adverse outcomes. Additionally, the Apollo aviation platform will continue to seek to opportunistically deploy capital in the face of widespread uncertainty and market disruption. To be clear, Merx is focused on its existing portfolio and not seeking to materially grow its balance sheet portfolio. However, growth in the overall Apollo aviation platform will nurture the benefit of Mercs as the exclusive servicer for aircraft owned by the other Apollo funds. As discussed on prior calls, Merx has built a best-in-class servicing platform and acts as a service or a technical advisor for aviation assets across the broader Apollo platform. With that I’ll turn the call over to Greg, who will discuss the financial performance for the quarter.

Thank you, Tanner. And good afternoon, everyone. Beginning with the statement of operations, total investment income was $54.4 million for the quarter, reflecting lower interest income due to a smaller investment portfolio, partially offset by an increase in fee income and a slight increase with prepayments. The fee income increased $1.2 million compared to $200,000 last quarter. Prepayment income was up slightly to $2.4 million compared to $2 million last quarter. Dividend income was $1.1 million essentially flat quarter-over-quarter. The weighted average yield at costs on the corporate lending portfolio was 7.8%, essentially unchanged quarter-over-quarter. Expenses for the quarter were $26.1 million down approximately $1 million quarter-over-quarter, primarily due to lower interest expense and lower management fees. Interest expense decline due to net sales and repayments within the portfolio. The weighted average interest cost increased slightly quarter-over-quarter due to the decreased utilization of the credit facility, given our de-leveraging. Management fees declined due to the decline in the average portfolio. And there were no – and there was no incentive paid during the quarter. Net investment income for the quarter was $0.43. As Howard mentioned, net leverage at the end of December was 1.43 times, down from 1.56 times at the end of September due to $130 million of net sales and repayments during the quarter. The increase in net assets was driven by $4.9 million or $0.08 per share of net gain on the portfolio and $4.8 million or $0.07 per share of retained earnings as net income was in excess of the distribution recorded during the period. We did our supplement on Page 16, we have broken up the net gain or loss by strategy. Our corporate lending portfolio had a net gain of $11 million or $0.17 during the quarter. Merx had a gain of $1.1 million or $0.02. Non-core and legacy assets had a loss of $7 million or $0.11 during the quarter. NAV per share at the end of December was $15.59, a 1% increase quarter-over-quarter. As previously announced, during the quarter, we extended the final maturity of our $1.8 billion senior secured revolving credit facility by two years to end in December, 2025. There were no changes to pricing or advance rates in connection with this extension. We greatly appreciate the support from our lending syndicate with this extension. Moving to liquidity, as the pandemic began, many of our portfolio companies drew on their revolvers during in the March quarter to shore up liquidity. Many of these drawdowns were repaid in the June quarter and repayments continued in the December quarters. MidCap is the agent for nearly all of our revolvers and delayed draw term loan commitment and is actively monitoring every commitment. For context, at Midcap leverage loan revolvers were 23% utilized pre-pandemic. Revolver utilization peak at 70% in mid-April, and as since declined to approximately 27% today. Given the reduction in AINV’s net leverage and improved quality of our investment portfolio, our liquidity position continues to strengthen. At the end of the quarter, we had $1.5 billion of total debt outstanding, a decrease of $88 million quarter-over-quarter, and a decrease of $289 million at the end of March. At the end of December, we had $330 million of immediately available liquidity up $62 million quarter-over-quarter and $107 million since the end of March. Also at the end of December, we had $313 million of additional capacity under the facility up $26 million quarter-over-quarter and $182 million since the end of March. Moving to unfunded commitments, which we disclose on Page 18 of our earnings supplement, our outstanding commitments at the end of December totaled $310 million of unfunded revolver and bridge commitments outstanding. $212 million were available to borrowers and $99 million of the $310 million were not available to borrowers. Availability is based on borrowing base limitations and other covenants. There were no stock repurchases made during the quarter, but we will continue to evaluate purchasing our securities as appropriate. This concludes our prepared remarks. And please open the call to questions.

[Operator Instructions] Your first question is from Kyle Joseph with Jefferies.

Hey, good afternoon guys. Thanks for having me on taking my questions. Just wanted to get a sense, given the delevering you guys have done a good job doing. Are you guys kind of back in investment mode or are there still some assets you’re looking to rotate on your balance sheet?

Yes. The both. We are open to business, as we said, there’s – we’re doing a lot of volume across the platform. So we’re now sort of selecting the assets that fit our strategy and doing those. And we continue – first of all, we’ve always – we’ve been in a rotation anyway from the second lien and the non-core. But in addition, we’re – there’s reasonable sort of velocity across the portfolio, things paying off either opportunistically or strategically. So the ability to originate relatively regularly, given where our leverage is both the result of where our leverage came down to and also the fact that we continue to sort of have pay downs across the portfolio.

Got it. And then one follow-up from me. In terms of credit performance sounds like some puts and takes in terms of non-accruals, but in the corporate lending portfolio, can you give us a sense for a revenue and EBITDA growth trends you’re seeing in the fourth quarter and how that compared to the third quarter. And then just discuss how amendment activity trended to close out the end of the year?

Yes, sure. So in terms of Q3 versus Q4, definitely an acceleration. There has been, Kyle, as will not come as any surprise. There is the delineation of those that are affected, and those that aren’t and obviously the differing fortunes as a result. In terms of amendment activity, there was a decline, we do quote numbers that are based on total amendments and we try not to impugn kind of what is actually really – we include everything in that number. But if you look at the amendments that are indicative of stress that has gone down, which it should in any event, because likely those companies that had required an amendment have already undertaken one, but certainly a decline is a good sign in that, no further – less further stress is materializing.

Got it. That’s it for me. Thanks for answering my questions.

Your next question is from Casey Alexander with Compass Point.

Hi, good afternoon and thanks for taking my questions. I have two questions. One, if you’re back in investment mode does that also mean that the company maybe back into a position where it can start to become active on the share repurchase program again?

Yes. Okay. I’m sorry if they’re going to ask both the ones. The answer is, yes, that stock repurchase plan is open. Obviously, as we said before, it sort of depends on a combination of things, which is sort of our – the amount of liquidity we have at a given amount of time and really where the stocks trading at, but it continues to be and I think we’ve been through this on the call before obviously, a good return on the stock. So there were a number of things obviously working through at the end of the year, in terms of wanting to get our bank facility down and getting our leverage down. But yes, I mean, we have a stock repurchase plan that is approved and open, and we will continue to take advantage of it and use it appropriately going forward.

All right. And secondly, in this question may sound harsh. But I think it’s a fair question for investors to ask. And if I look at Page 16 of your schedule and look at the losses that took place in the March quarter and what gains and losses have been since then. Apollo is one of the very few BDCs, where NAV is lower than where it was at the end of the first quarter, whereas the vast majority of the universe has had at least some sort of bounce back, if not a substantial bounce back. And so to what extent are some of the losses that have been taken over the last 12 months, which as your schedule shows us $3 a share. Would you say are still recoverable at this point in time?

Yes. So there’s – I agree, totally fair question. So feel free to ask, they’re more fun anyway. There’s three categories of sort of the write-downs during that. One was the corporate portfolio, which we regain back. I think we said 62% of the losses attributable to that. And we think the vast majority of that is still recoverable. Like, there’s – you would see those loans on non-performing or watch lists, if not. And so – and there particular names that, make up sort of the bulk of still that gap that we feel pretty good about. It’s Merx, which is responsible for a reasonable amount of that. And Merx, we also believe that we have hit a pretty conservative level of valuation and how we’re running it. I’m more tentative on that just because the pandemic is not over in airlines and how airlines are going to do. Going forward, it’s not set, but assuming a recovery over time, over this next amount of time without picking a date, we think that our plane – most of the airlines we work with have worked through stuff. We are – we have things back on lease, we have a sense of where sort of the cash flows are going to go and we think that, that’s positioned for some of that recovery. The last thing that drove a bunch of it was, the oil and gas was written down quite a bit or the commodity or once the oil and gas and carbon-free, which is commodity driven. Those both have idiosyncratic issues about them and also commodity exposure and its long-term commodity prices. And so those are – I think people have historically, and certainly you Casey had viewed those as not worth much anyway, regardless of where they’re valued. And we hope – we think we value them as best we can given the inputs we’ve had, but that our view has always been exiting those as best we can. We’ll give more clarity and you won’t have to ask that question, because you wouldn’t have the volatility. So if I can just return back to your initial question, I think if you looked our corporate book, we would compare very – the corporate business would compare very similarly to our competitors.

Okay. All right. Thank you for – I understand that the last 12 months in the corporate book is $0.35 a share out of $3. So I’m just trying to figure out how much of the rest may be realizable. And look, I understand oil and gas is a commodity. Oil in the ground is still oil in the ground. I actually am more concerned about Merx Aviation, because planes on the ground become older planes on the ground and they depreciate. So that’s where I’m wondering kind of what’s recoverable there.

Yes. So Tanner could spend some time on that. And I do think it’s relevant to spend a little time on it. Because I agree, obviously, that’s something that people need to focus on value where aviation is. The expected depreciation of these planes goes into the valuation and plus – if time passes by day depreciate and that’s built into the valuation at relatively meaningful discount rates. That gets – so there’s two portions of the valuation, what the planes are worth down the road, which go down over time and what our cash flows are off the planes. And if those cash flows change, because our lease has changed, those things change. The stability of that value is driven by, like, a bunch of things, like ultimately, what are these planes going to be worth at the end of the day and the fact that we had sort of narrow body planes that consistently stay in place helps that and you’ve even seen those values stay up even throughout this crisis. The diversity of our lessors, as well as our ongoing relationships across the Apollo platform, with those lessors to continue to deliver value to them and have those strong relationships. And then in addition, just the pure structure of Merx, which is that everything is not, they are in separate pools of value. There’s lots of them, there’s cargo jets, there’s some wheel and completely, there’s some in securitization and servicing platform. And so the diversity of those pools of value basically less than the volatility or the worst case scenarios as you work through it. But there’s no question that we continue to need to see more visibility to the recovery, for people to get complete comfort with that value there. We feel like we are positioned to recover from where we are today, but that could be wrong and time will tell.

All right, great. Thank you for taking my questions. I appreciate it.

Your next question is from Finian O’Shea with Wells Fargo Securities. Finian O’Shea: Hi everyone, good afternoon. I’ll actually ask to continue on Merx, just the small question. I think in Tanner appreciate the color you’ve been giving. It sounded like the change this quarter was continues to be stable, and there’s a lot of good things about the value of the residual value and such, but some of the – I think you said passenger category caused a decline or maybe took away what would have been a bigger gain. Can you expand a bit on that just given, since you last talked, the Pfizer vaccine came out in the world looks a lot better? Did something happen to passenger aircraft broadly or was this a more isolated incident in the portfolio?

Yes, sure. Happy to Fin. And so the – I would answer that question by saying yes, the Pfizer vaccine amongst others is one thing that the market has been looking through to. When we look at that – when we value the asset, we’re looking at a number of things, including near-term cash flows. And while things have broadly been in line with expectations, there have been some puts and takes. I did mention that we’re very pleased at many of our lessee customers came back online after the initial deferral period, certain others getting and taking an account of that to your point offset some of the gain that we saw from the extension that we were able to get done with the freighter. So some negativity there, which in some ways does not comport with maybe broader markets and their faith in the vaccine. I think from here, I would call upon Howard’s comment as well. I think we’re positioned to the extent that the vaccine does start to pick up pace. That will be a very good thing to state the obvious. And then also we would harp upon from evaluation standpoint the lever we have with respect to incremental transactions that the Apollo platform does as providing incremental revenue opportunity with no stress to the balance sheet of AINV and Merx from the servicing revenues that we get that could help to boy that valuation in the coming quarters and coming years. Finian O’Shea: Okay. That’s helpful. Thank you. And so I just a one more high level question on the net runoff this quarter in the context of you, Howard said, the platform origination was very robust, but a little less so on the BDC. It felt like last quarter that you were okay or more confident in your ability to deploy given the progress and leverage you made to at that point, obviously now you made more progress. But was there – if you agree was there any change in leverage posture this quarter? Given, my impression was last quarter that you were more willing and able to engage in the market, is there any commentary there?

Yes. Sure, good question Finian. And no there’s no change in the posture. For instance, I’ll just give you an example as we – we are within our target now, and we did mention in last quarter that we wanted to get back into the market. For instance, one of the events that happened this quarter was we had a second-lien investment that got taken out by a broadly syndicated loan. And the deployment is always, is not necessarily on the screen, there’s a lead time to it. And so it was, I think that the management of cash and the sometimes idiosyncratic nature of repayments. You’re right to ask the question, but you should not interpret it as a change in posture with respect to our leverage guidance or comfort level. Finian O’Shea: Okay. That’s all for me very well. Thank you.

Our next question is from Melissa Wedel with JPMorgan.

Good afternoon. One is the follow-up on the repayment activity, shortly was elevated in the last quarter. I’m wondering if you have any visibility into whether you expect that to continue in this quarter ahead or several quarters ahead.

We do maybe not exactly at this level, but there’s still meaningful activity in the portfolio as you would expect in the normal course. We would – the corporate portfolio, the first-lien portfolio should generally have an average life of three years. So that corporate portfolio in a normal environment should be paying-off one or something like that per quarter. And I don’t know, maybe like 1.25, something like that. And I think the market’s starting to come back to that normalized behavior. So we do see like reasonable, whether it’s exactly that amount in a given quarter who knows, but there is certainly some significant loans either set up to be repaid in the near future through sort of normal transactions. As well as obviously as we’ve continued to say, trying to monetize our non-core investments as best we can to get repayments there as well. But yes, I mean, I don’t think the amount of repayment activity, if you went through all of the quarters over the past three years against the corporate portfolio was such an outlier. It was just a robust quarter of activity so there’s more repayment and we do expect to continue to see reasonable philosophy.

Okay. So following up on that, you are within – leverage is down but also sort of within range. How do you think about balancing the trade-off of ramping new investments, as you said you’re interested in doing versus holding back, holding some dry powder for dislocations or sort of opportunistic investments?

Yes. So one thing that I think is really important for us in sort of what we’re trying to lay out, we have two sort of cross winds. One is our corporate portfolio that’s very predictable and understandable for everybody. And we think it has a history based on mid-caps origination and our history with the corporate portfolio, very solid and predictable. And then we have these other assets, Merx and these non-core assets which have more volatility to them which is one of the challenges for investors. On the corporate side, one of the best things that we can do is have as many names as possible. So generally if we see a transaction we’d like to be into we are more likely to toggle the amounts we do, than we are to decide whether to do it or not. And then that can be more of a real-time decision based on sort of where we see actual repayments coming in the next 45 days versus what new originations we had. And so we feel pretty confident about our ability to keep leverage within sort of the range of, I was going to say like, if it’s with it – if we can keep it portfolio within range of a $100 million or so that’s between 1.04 and 1.05. And we feel like we have pretty good control of that. Because remember, like these deals are generally bigger, they’re originated by the platform. AIV can choose how much it wants to take and it can really choose real time up to closing how much it wants to take. So we have a pretty good capability, so that’s how we basically choose. We want to continue to sort of diversify the portfolio, choose the ones that fit best based on the yield profile we want going forward and the credit risk we want going forward. And we think we can continue to sort of balance all of that. Even as opportunities – even as the market fluctuates, it does feel like and I think you’ve heard this probably from other people and we’ll hear that more during the course of this quarter that the market is returning to pre-COVID levels. And so, disconnect in the market obviously could come but it’s not where it’s trending right now in the short-term.

Thanks for taking my question.

[Operator Instructions] Your next question is from Ryan Lynch with KBW.

Hey, good afternoon. And thanks for taking my questions. The first one I had was just around your guys targeted leverage range that you guys set. When I look at that and compare that to your pre-COVID target range, I mean, I think the upper end is same or a little bit higher, and then the bottom is also a little bit higher. So it’s a little bit more of an aggressive leverage range today and you had pre-COVID. And of course hindsight’s always 2020, but in your prepared remarks, you talked about now beginning to – given that you have reduced leverage now, beginning to shift the focus to making new investments in this environment. At the same time you also talked about the environment of the investments today, really returning to pre-COVID levels. And so because your leverage levels is so high, coming into the down-turn, you guys had really paused and where net sellers and active investments went, the investment opportunity was the most attractive and now that the market kind of returned to pre-COVID levels from term constructions [ph], this is now how you guys are going to point capital again. So in part, I might have been, you guys having too higher leveraged target and operating into higher leverage coming in the downturn. So I am wondering what your thoughts were on that ballpark and how you guys consider keeping kind of the leverage trend which is more aggressive today than it was pre-COVID, when it kind of kept on your heels during the last down-turn?

Well, so I don’t know if I would agree with some of those characterizations. But let me sort of go through them. This was around the leverage range we said. I mean, I know there was something one three to one five, and then we said one four to one six, but we were always right around, the one four to one five range being sort of the sweet spot. And that’s still is sort of where we are. I would say certainly, right. COVID caused stress for people, but I would underline that we did not do a rights offering. We had no liquidity issues and we were able to manage our portfolio well through all this despite what people’s perception would be. And I think that is largely because of the type of portfolio we had. It all paid. There weren’t concentrations in that corporate portfolio, and we were able to sort of get liquidity off that portfolio when we needed it. Then I will also add, I do agree with you obviously when you get to a higher leverage and you have to stop investing, you can lose an opportunity. I don’t believe we ended up losing that much of an opportunity during this crisis, because you didn’t see any of our competitors, even the ones that are under levered originate very much in the second or third quarter. So the market was sort of paused because of uncertainty. So in this case, and I think part of the reason we have been active this past quarter is that the opportunity is still there versus pre-COVID, but it’s just compressing, from where it was before. So I don’t think it may be through some fortuity, but I don’t think this was navigate – I don’t think the way this navigated through was necessarily like an indictment on where we were before. So there is a question with regard to what should our strategy be? Should we be at 1.25? So we always have dry pattern. We always can take advantage of a disconnect. We have said over and over that our approach is we will have the highest quality, most senior, most diverse, I can [ph] most, close to that corporate portfolio by the time, everything is cleared out that the predictability of that and the stability of that at one four times, we’ll match by a long shot what many of our competitors do? Obviously, there’s lots of people do really good job and do niche things and do them well. And so we think running at that level will gives us plenty of flexibility and deliver sort of a value proposition to the investors, good dividend return on their money, with real predictability and is consistent with what is effectively one of the few biggest origination platforms in the country. There’s just lots of deal flow coming in as ability to cherry pick that type of portfolio. So that’s sort of our strategy. I don’t think this particular crisis hit us poorly on that strategy. Because I don’t know if I’ve seen any other BDCs do the flip side of what you just said yet.

Got you. Yes. Yes. I understand. Those are some fair points with that kind of pivoting a little bit and turning back to Merck’s. I know you said you’re not going to be super active as far as the spanning Merck’s balance sheet. But obviously you guys are looking at potentially expanding, benefiting from the servicing business you get, managing other funds and airplanes across the Apollo platform. Were there any meaningful transactions or movements regarding the service inside and in the calendar fourth quarter and what is specifically the – what did you kind of as you say today, outlook on the potential to kind of expand that part of the business, call it the first half of 2021 – calendar 2021.

So, yes, sure. I’ll take this one. There we have – amongst other opportunities, we have a dedicated commingled fund that we are in the process of investing. There have been some additional deployment as well as exits. And you can think about exits as in certain cases as pulling forward some of those future servicing revenues that you would otherwise get. And so, as it relates to outlook, we are – we value the – what we have like in the ground today, and we have a significant unused capacity, both in the fund that is Merck’s is the dedicated servicer of that’s the aircraft leasing fund as well as also a significant opportunity to do things across the broader platform. So with just investing the capital that we have available to us additional opportunity to turn revenue to your question.

Okay. Thanks for that. And then Greg, I just have one last one for you. These are two consecutive quarters with gains in the portfolio. You guys obviously still aren’t earning any incentive fee. If we would hold the portfolio constant today, no gains or losses going forward. Do you have any estimate of when you think your guys’ incentive fees would turn back on?

Yes. If – when we kind of look at it, you’d be looking at the December, this December quarter 2021 that’s when it would turn back on a part of it, I don’t think all of it would come back at that point, kind of full back starting in 2022.

Okay. That’s all my questions. I appreciate the time this afternoon.

Thanks a lot.

Your final question is from Robert Dodd with Raymond James.

Good afternoon. And thanks for taking my question. Two questions if I can. The first one at the risk of beating a dead horse is about Merck’s. Can you give us any color on I mean, the way the average lease left is 3.9 years. I mean, but how much green time is there available on the aircraft and the engines? I mean, basically, is there enough cash flow within the portfolio that the Merck’s can fund to shop visits to refresh the engines? Or is there the risk depending on how many – how long this, the lower passenger demand, et cetera, et cetera, drags out that that could be additional capital needs that Merck’s just to keep the equipment fresh and pliable.

Yes, sure. Hey, Robert, I’ll take a stab at that. There are a couple of things there, so I’ll try to remember each aspect of your question, but please follow up if I don’t hit it. So in terms of, let’s talk about useful life, right? You’ve got – you rightly pointed out we have about four years left in terms of lease term. Right. But then you can also think about it in the context of our average age of plane is in around 10 years and the average life of a passenger airline – a passenger airplane, excuse me, is 20 years. So you’ve got a lot of useful life embedded in that asset. As it relates to what needs to be done in terms of maintenance and maintenance overhauls to the planes, you were oftentimes receiving payments alongside the lease payments to defray those costs from our lessees, and in many of the instances we’ve had those amounts reserved, which gives us the ability. And then the other thing I’d say there is that, when you take a – when you invest in a plane, when you do the maintenance overhaul, and you take the number of remaining cycles up that is something that is liquid, that you do generally get that value back that can be, whether it’s in the form of an engine where you can repurpose it somewhere else or move the plane. And so in addition to having that capital already reserved in certain cases, so to also, when you do invest that money, it is typically, you can get the – it is liquid and you can refurbish the plane. And then, I think the final, sorry, and I think you had one more question there I’m trying to sort through all of them.

That’s very helpful. I mean, my only question there is, obviously you talk about reserves. Reserves aren’t necessarily cash, right. So I mean, talking about the cash flow, but I’m sure you account for it correctly with reserves, et cetera, et cetera. But is there the cash flow to do that? Or would there be additional cash needs rather than reserve et cetera? Because you’re correct, I mean, when you overall – one of these things, you get something with value back that you have to lease out again, but it takes actual cash flow to kind of fund that process?

Yes. Cool. Yes. Excellent, sorry. And so when the reserves, the answer is in certain cases we do actually have had the cash in hand to undertake that. And then the other part of your question that, sorry, now I’m remembering, you asked the question about passenger levels and the way to think about it. I think if you look more broadly, you can look at aircraft leasing as having been certainly more resilient than the performance of the under airlines to state the obvious. And so while certainly the ultimate value of these planes and residual value in particular, as well as also in the interim, in certain instances the ability for airlines to make these payments is obviously compromised. And in the case of residual, values could go down as it relates to where passenger levels get too. But it is more resilient, right? In terms of yes, yes, if you go out of business and it liquidates, but so long as those planes are flying you do have some modicum of increased resiliency relative to the airlines that it’s important to understand in that context.

Got it. I appreciate that. Thank you. Second one, if I can not to do with Merck’s. And obviously I be, so your leverage is in any target range. I mean, what’s your view of the unsecured markets for BDCs have been to say the least open this year in terms of availability capital, and then some of the lowest all-in costs on unsecured we’ve ever seen in the space. You have relatively not very; very low, but only 20% of your debt stack is unsecured. What’s the interest appetite, if you will for taking that up, were you happy with that mix where it is right now?

Greg, you want to...

Yes. I’ll answer that Robert, I mean, I think if you, one, we were able to move out the maturity of our senior credit facility with 100% support from our banks. So that was very important to us. Today we’re running at a cost of – the combined cost of debt of 3%. And we’re very conscious about that, where we are today, but also if you think we still have a March 25 maturity on our unsecured notes. So we are taking that there, we know kind of within the next two years, we need to take advantage of kind of refinancing part of that. We today have enough liquidity under our credit facility. But that’s not really where we want to put it. We do want to have a 25%, 30% of our capital other than equity in unsecured debt. So we will look to take advantage of that. I think what we’ve wanted to do is to right size the portfolio, get it to a point, get our dividends set, and manage the fund so that we can say as we look forward, what is the best way to, as Merck’s comes back on, as some of our – if you look at our non-recurring assets, we have $194 million at fair market value assets, and they’re earning us 4%. So I think as we look at, are going forward we’re measuring all of those things and the impact of taking on higher cost debt. But we will have to do some of that. And we’ve talked to our banks about it. The market is open for us, and we’re just balancing when we should do it, based upon a lot of different factors in our earning capacity within our portfolio. Does that make sense?

It does. Thank you. It makes a lot of sense. I understand.

And Robert, I think the other thing that Tanner, talking about Merck’s a little bit, and I don’t mean to, but we have, and that we’ve disclosed this even. And every year we disclosed the Merck’s financial statements. We have reserved cash of over $60 million for our planes. And that’s where those are maintenance reserves that are in cash that we have. So those are trapped in securitizations, but they’re there to support the maintenance of those planes. So there is cash inside Merck’s for to your question.

Yes. I appreciate that; it’s just we only get the Merck’s financials once a year.

So, I think we had 90; the last time you saw it was 90. So it went down a little bit.

Got it. Thank you.

Okay.

There are no further questions in queue at this time. I’ll turn the call back over to management for any closing remarks.

Thank you. And Thanks everybody for listening today call. On behalf of our team we thank everybody for their time and their continued support. As we continue to navigate through this challenging environment. Please feel free to reach out to any of us. If you have any other questions, hope everybody stays healthy and safe. Have a good day.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.